Income Mobility in Ecuador: New evidence from individual income tax - PowerPoint PPT Presentation

Liliana CANO University of Toulouse - Lereps September 5 th , 2014 INEQUALITY measurement, trends, impacts and policies Income Mobility in Ecuador: New evidence from individual income tax returns 1

Outline • Goals of the paper • Motivation • Literature review • Data and methodology • Main findings • Concluding remarks 2

1. Goals of this paper • Analyze income mobility in Ecuador with a focus on the top and on the middle of the distribution. This study is based on income tax returns database from 2004 to 2011. • We study whether the evolution of top income shares has been accompanied by an increase or a decrease in mobility for the high income groups. • We study whether there is a surge of an Ecuadorian middle class. • We analize the factors associated with income mobility over the 2008-2011 period. 3

2. Motivations • The first motivation is based on the growing interest in the study of income inequality at the top of the distribution using income tax data and national accounts (Piketty 2001, 2003). • Method: Kuznets (1953), Atkinson and Piketty (2007, 2010). • Top income series in more than 26 countries. 4

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2. Motivations • The second motivation is based on the study of intragenerational mobility. • A recent economic report from the World Bank documented that almost 43% of Latin American individuals had experienced changes in their economic status over the last years. • Mostly upward movements. • In Ecuador estimates of income mobility are scarce mainly due to lack of appropriate data. 6

3. Literature review Sociological and economic approaches of mobility. In this paper we focus on • an economic approach. Literature on income mobility is vast : there is not a harmonized framework of • mobility measurement. Mobility might connotes different ideas to different researchers. An important review of conceptual and methodological issues is provided in • Fields (2000), Atkinson et al (2001), Jenkins and Van Kerm (2006), ,Fields (2008), Burkhauser and Couch (2011), Jantti and Jenkins (2013) 7

Drawing on the taxonomy by Fields (2001) : • – Two different magnitudes : intra-generational and intergenerational – Three broad conceptions of mobility – These concepts do capture very different aspects of mobility Directional IM (D) Income IM (ND) Non - directional Mobility as movement • Shares SM Positions (rank) PM Mobility as time independence • MTI Mobility as Equalizer of long - • ELTI term 8

3. Literature review on top incomes Author Country Data Findings Intra-generational mobility Auten and Gee (2009) United States : 1987 – 2005 Income tax returns 40% placed in the top 1% Auten et al. (2013) United States : 2005 - 2010 remains at the top in 2005. And more than 50% moved to a different centile. Kopczuk (2010) United States, since 1937 Social Security There is not mobility at administration the top. 60% probability of remains at the top. Saez & Veall (2005) Canada : 1982 - 2000 Income tax returns Not mobility at the top ; probability stay 60% Landais (2009) France : 1996 - 2006 Income tax returns Not mobility at the top : probability stay 67% Intergenerational mobility Chetty (2014) United States : 1996 - 2012 Federal income tax Mobility depends on the geographical area and the fact of moving is driving by factors like ethnic origin, parent’s income level, family characteristics, social networks, etc. But not for top 1%. Bjorklund et al (2012) Sweden Income tax returns Transmitions between fathers and sons at the 9 top is very strong. Elasticity of almost 0,9.

3.1 Hypotheses • H1: Income inequality declining trend has not improve income mobility at the very top. • H2: There is a high degree of upward income mobility in Ecuador over the past years. • H3: Upward mobility is mainly explained by the initial position in the income distribution. • H4: The upward economic effect of education on income mobility should be more or as important as initial position. 10

4. Data • Longitudinal micro data from income tax returns from 2004 to 2011. The universe of tax filers. • Information from 3 different types of tax form: – 107: salaries and wages – 102a: wages, self-employment income, capital returns and other possible source of income. – 102: income information (labor and capital) for individuals who required to keep accounting books. • For instance: 2.3 million tax filers in 2011 • Unit of observation : individuals • Anonymous data 11

4. Data • Advantages of tax statistics: Tax data are relatively homogenous within a country. • Provide a better picture of the top and the middle of the distribution. • Provide composition of incomes. • Real panel database. • • Disadvantages of tax statistics: Evasion and elusion. • Tax reforms change the definition of income across time. • 12

4. Data • Information on individual characteristics of tax filers from the Ecuadorian Civil Registry. • Six explanatories variables. – Initial position in the income distribution: i.e. 10 deciles – Age: -20 years, 20-29, 30-39, 40-49, 50-59 and 60 + years – Gender: 1=men, 0=women – Marital status: 1=married, 0=otherwise – Level of education: 1=high school and more, 0 less than high school. – Geographical region: North, Center, South, Coast, Pichincha and Guayas. 13

5. Methodology 1. We construct annual series on top shares of income by relating the amounts of individual income tax returns (numerator of the share) to a comparable control total for full population (denominator of the share). Income definition : income reported on tax returns that includes – salaries and wages, self-employment and small business, rents and capital income (interest and dividends) and items reported as other income: long term capital gains, inheritances, donations and legal deductions to obtain income. Income definition is before personal income taxes and employee – payroll taxes. Top 1% (P99 – P100), top 0.5% (P99.5-100), top 0.1% (P99.9-100), – top 0,01 (P99.99-100) etc. 14

5. Methodology To construct incomes shares : income of each fractile / – control income reported by household surveys. Period: 2004-2011 – • Control for total income Total income from Ecuadorian household survey – ENEMDU wages, self-employment, capital, transfers, secondary – income. (~65% of GDP) • Control for total population Information from ENEMDU – Adult population (economically active population) age 20 – and older. 15

5. Methodology • Top income persistence: we calculate the probability of remaining in the top 1%, top 0.1% and the top 0.01% after different periods of time (Saez and Veall, 2005; Landais, 2009) • Transitions between top fractiles: Using transitions matrices we examine movements of individuals across top fractiles. 2. We analyze mobility for all tax filers from 2004- 2011. - Income deciles are constructed relative to the tax filing population. 16

5. Methodology 3. Factors associated with mobility in Ecuador 2008 - 2011: we estimate transition probabilities of upward or downward movements while controlling for control variables: Counting procedure – Multinomial logit model – Generalized ordered logit model – • Tax filers in 2008: 1.9 million • Tax filers in 2011: 2.3 million – Control by initial position: 1.4 million of observations – With all control variables: 737.891 observations 17

Methodological limitation : how many income centiles? We use two additional methods: A multinomial logit model to assess upward or downward – movements of at least 10 centiles from a given initial position. A logistic model where the dependent variable measures – the change in the percentile position of an individual from 2008 to 2011. 18

Main findings 19

Table 4. Thresholds and average incomes in top groups within the top percentile, Ecuador 2011 Income threshold Average income Number of tax Thresholds Income Groups US$ US$ (PPP) units US$ US$ (PPP) (1) (2) (3) (4) (5) (6) (7) 9 408 267 $9 417 $17 896 Full Population P90 $7 141 $13 572 Top 10-5% 470 413 $28 648 $54 446 P95 $12 898 $24 512 Top 5-1% 376 331 $32 350 $61 481 P99 $33 800 $64 236 Top 1-0.5% 47 041 $91 712 $174 298 P99.5 $47 537 $90 342 Top 0.5-0.1% 37 633 $102 172 $194 176 P99.9 $98 236 $186 695 Top 0.1-0.05% 4 704 $299 473 $569 145 P99.95 $138 201 $262 648 Top 0.05-0.01% 3 763 $337 840 $642 059 P99.99 $313 641 $596 071 Top 0.01% - Top 0,001% 847 $773 507 $1 470 039 P99.999 $1 132 662 $2 152 608 Top 0,001% 94 $2 893 022 $5 498 146 Note : In 2011 for Ecuador PPP US$ 1 = 0,52618 Note 2 : Computations are based on income tax returns statistics. 20

Fig 1. Income Share of the top 1 percent in Ecuador 2004 - 2011 40 35 30 Income share (%) 25 20 15 10 Top 1% 5 0 2004 2005 2006 2007 2008 2009 2010 2011 Source: Author's calculation based on individual income tax returns. Number of tax units is estimated. Total income is estimated from household surveys. Top shares are obtained from income tax returns statistics. In 2011 almost 20% of total income goes to the top 1% of the population 21